Mar 20, 201311:09 AMOpen Mic
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The Dow hits a new record: Now what?
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The Dow Jones Industrial Average recently hit a new record, reaching heights not seen since October 2007. Should that affect your investment decisions?
Depending on how you’re wired, your emotions might go in one of two directions. You might think you’re missing out on the action and better invest more in the market before it goes even higher. Or you might think the opposite: At this lofty level, it can’t last much longer. Better bail before that happens.
Commentators talk about the “psychological barrier level” that the Dow crossed going above that number, but what’s perception and what’s reality?
Here are some facts to keep in mind before letting the latest Dow Jones average dictate your financial activities:
It’s only one index – and it’s not representative of the overall market. The Dow tracks only 30 “blue-chip” companies and, for a variety of reasons, excludes some of the most valuable American companies (Apple, Amazon, Google) while including companies worth far less (Alcoa, which has been trading at under $10 a share). By contrast, the S&P 500 includes – you guessed it – 500 separate companies and therefore is a statistically more valid indictor of overall stock trends. Part of the reason the Dow is followed closely is that it’s the oldest index – created in 1896 – but for the same reason, its results are skewed by its dated computational methodology.
Remember the Nasdaq – or not. If you were paying attention to the stock market in the heady days of the tech bubble, you may remember seeing the Nasdaq climb to record levels. Investors were excited about the so-called “New Economy” and believed that the tech-heavy Nasdaq was the place to invest. The index doubled in value in a year and, at its peak in March 2000, reached 5,132. But as investors began to realize that many of the companies of the dot-com revolution were propped up by venture capitalists rather than revenue streams, the bubble burst. By October 2002, the Nasdaq had bottomed out at 1,108. This year as the Dow was reaching 14,000, the Nasdaq was at about 3,200.
Investing requires a long view. The takeaway here is not that you should run the other way when an index hits a new high, nor should you let the escalating prices be a reason to invest everything in the market. Rather, you need to look closely at both the overall economic reality and what developments, if any, may require a change in your financial plan.